Saturday, January 23, 2010

Restore trust in participating policies

Participating policies, i.e. endowment or whole life policies, are designed to provide a guaranteed yield at a modest level (say 1% p.a.) and to provide variable reversionary and terminal bonuses that can increase the yield to a higher level. The bonuses are declared each year based on the financial results of the insurance company.

In the past, most life insurance companies were able to give an attractive yield to the policyholders. The insurance company invest the money well with a long term perspective and were able to achieve an attractive return. After taking away a fair proportion to cover their expenses and profits, they distribute most of the surplus to the policyholders with a high rate of bonus.

The insurance company maintains a manageable number of policy series, and distributes the same rate of reversionary or terminal bonuses to all policies in the same series. The policyholders in each series can see that they have been treated equally with other policyholders in the same series.

This practice has changed in recent years. Insurance companies have introduced too many policy series and distributes different rates of bonuses to policyholders in the same series. It is difficult for any policyholder to be sure that they are getting the fair rate of bonus, based on the actual experience of the fund.

To make matters worse, some insurance companies retain too much surplus in the fund, under the purported aim of  "smoothing the bonus", or use the surplus to pay for high expenses, resulting in a poor yield to policyholders.

It is the lack of clarity that gives a bad name to participating policies in recent years. Many policyholders find that the projected bonuses made at the inception of the policy had been severely reduced due to "difficult investment climate", but it is not clear if the reduction is due solely to this cause or to other unethical and unfair practices.

To overcome this problem, the insurance company can adopt the "asset share" method to distribute bonus. This method ensures that each policyholder gets its fair asset share on the surrender or maturity of the policy based on the actual experience for that policy. It is quite to adopt this method using modern computer technology.

Some countries make it mandatory for the "asset share" method to be used, to ensure that the policyholders are fairly treated. The regulator in Malaysia took this step many years ago, in their effort to protect the interest of the consumers and to ensure fair practices.

In Singapore, many insurance companies have severely reduced their reversionary and terminal bonuses in recent years, often more than expected.  Many consumers have lost trust in the participating policies and the insurance companies that sold these policies.

I hope that the regulator in Singapore will implement the "asset share" method early, to ensure that all policyholders are given a fair return in this volatile situation and that the trust in participating policies can be restored.

Tan Kin Lian

Friday, January 22, 2010

Training software: Pro-Investor

Develop your skill in picking the right stocks for long term investments. This skill comes from many years of experience. This simulation software allows you to acquire a lifetime of experience in a few hours. Click here to play the game.

Read the Guide. Register an account. You start witl Level 1 and will progress until Level 9. Good luck.

GST penalty for small business

I wrote to Today Paper that a small business has to suffer a penalty under the current Goods and Service tax (GST). It has to pay GST on its purchases and is not able to recover the GST from its business customers and on its exports. This has forced many small businesses to "volunteer" to register for GST, even though the amount of GST payable is small. It causes administrative work for IRAS and compliance cost for small businesses to keep records to prepare and submit the quarterly GST returns.

To avoid this problem, I suggested that the the GST law be changed to allow business customers to treat al ltheir purchases as qualifying from GST, including the purchases from the small entities that are exempt from GST.

IRAS has replied that it is not able to offer GST credit for exempt entities who do not pay GST. This reasoning overlooks the fact that the exempt entity has to pay GST on many of its own purchases already. By taking a rigid position, IRAS is creating unproductive and wasteful work for small businesses and itself. Even the business customers have to keep separate records to segregate purchases from exempt and non-exempt suppliers.

IRAS did not contact me to discuss the issue before giving its reply. There is no attempt by IRAS to understand the issue from the point of view of the taxpayer. I hope that our authority can be more open for discussion and dialogue on important issues that affect the cost of doing business in Singapore.

Tan Kin Lian

Thursday, January 21, 2010

Growth of free lance jobs in US

Read this report. It shows a trend that may hit Singapore.

Benefits of Life Insurance

Life insurance performs two useful functions:
a) Provide financial security in event of premature death or disability through the pooling of risks
b) Provide a useful service for ordinary people to pool and invest their savings to get an attractive long term return.

If it is practiced fairly, transparently and honestly, it can bring tremendous benefits to ordinary people. This was how life insurance was practiced for a long time in the past. It was useful to society.

In recent years, life insurance has been changed to be a way for financial institutions to make large share of the gains, and to offer a poor return to the unsuspecting, trusting public. The charges taken away from the consumers to pay the high marketing expenses, salaries and profits are excessive - perhaps unconscionable.

I hope that the leaders of life insurance realize that they have a responsibility to offer a fair return to the consumers who trusted them to take care of their future. It is necessary to pay for the expenses and make a fair profit, but the charges should be reasonable and the interest of the consumers must also be protected.

I hope that the regulator will make it possible for the public to enjoy a fair outcome. This will make life insurance a good way for consumers to save and invest for the future.

Tan Kin Lian

Purpose of insurance regulations

Some regulators consider that their primary duty is to ensure the solvency of the insurance companies, as financial failure will cause hardship to the consumers. Solvency is important, but is not the only risks faced by the consumer.

The regulator has also to pay attention to all four duties, as follows:
- Maintain insurer solvency

- Compensate for inadequate consumer knowledge
- Ensure reasonable rates
- Make insurance available

Consumers are not well versed in insurance and may be badly treated through legal contracts that are not transparent and not fair. A common example is the use of irresponsible projection to entice consumers to invest in insurance contracts, and to give a final payout that is much lower than projected. Badly worded or unclear language in policy documents also place consumers at a disadvantage as the consumers are not able to afford the legal fees to have the contracted interpreted in the court.

The regulator has also to ensure that the insurance rates are reasonable and that consumers are not overcharged due to their ignorance of the market or their inability to judge the value of the insurance protection that is provided.

At the other extreme, the regulator also wants to prevent irresponsible price cutting that may lead to insolvency of the insurers. If an insurer cuts price to an inadequate level, other insurers may be forced to follow, to protect their market share.

The regulator also aims to ensure that insurance is available, especially for people or risks that are considered to be unprofitable. As motor insurance is compulsory, it is necessary to ensure that it is available to people who are considered to be high risk, as they would otherwise by denied the right to drive a car.

Tan Kin Lian

Mark to market and asset bubbles

There is an accounting principle called "mark to market". It is generally recognized that the most recent transaction represents the best indication of the current value of a specific asset and that it is better for the financial accounts to share the "fair values" of these assets.

This accounting principle works well when there is a true market with many transactions or where the prices are not driven by manipulation, speculation, gambling, greed and fear.  Unfortunately, the imperfect situation occurs more commonly than the true market situation.

Many property transactions do not reflect the true market as they are big ticket items, and are driven by manipulation and fear. These transacted prices are then used to create an impression of the market values. This is how bubbles are created.

Bubbles will create wealth for the speculators, but will eventually have to burst, giving a lot of economic pain for ordinary people who are caught with the over-priced assets that have to be paid over a lifetime. This does not create a sound economic or social foundation.

I hope that the "mark to market" rule can be modified to recognize its undesired role in creating bubbles in properties. I also hope that effective measures be taken to prevent future bubbles, such as the recent measures taken in Singapore and now being applied in China. It recognizes that property prices cannot be left to the market and have to be better controlled.

Tan Kin Lian

Broadcast of World Cup matches

How much should the operator pay for the right to broadcast the World Cup matches in Singapore? FIFA wants $100 million. The operator (Singtel, Starhub or both) offers to pay a lower fee, as they are not likely to get sufficient revenue to make a profit.

This is free market at work (or rather, fail to work). There is free negotiation, but there is no real market, as there is only one supplier, i.e. FIFA. Is FIFA abusing its monopolistic pricing power, or is it just trying to get a fair amount from affluent Singaporeans?

Rather than pay a flat fee, it would be better for the operator to work with FIFA on a revenue sharing formula. FIFA can decide on a fee per viewer (for the entire series of matches) and the operator can add on its charges to offer the final product to consumers. The price charged will determine the number of subscribers who are willing to pay this fee.

Let me make a guess about a fair fee to pay to FIFA. I estimate that 300,000 homes would be willing to pay $150 to watch the matches on TV. The operator has to keep $50 to cover its marketing and operating cost. This would leave $100 per subscriber for FIFA, or an estimated $30 million for 300,000 subscribers.  If the viewer is willing to pay $200, the fee to FIFA could be increased to $45 million.

I hope that the operator can agree with FIFA on a revenue sharing model or FIFA should reduce its fee to $30 to 45 million. This would be in the interest of soccer and sports.

Tan Kin Lian

Wednesday, January 20, 2010

Policy wordings

In many states in America, the policy wordings used by insurance companies have to be approved by the regulator. I find this to be a good practice. The regulator can check that the wordings are clear and are fair to consumers. It will minimize disputes that have to be resolved in court. It is also a good practice for insurance companies to use standard wordings for the common types of coverage, rather than be allowed to write their own wordings.

I hope that this practice can be adopted in Singapore and that the regulator can play an active role in achieving this outcome - to ensure fair treatment of consumers.

Tan Kin Lian

Fair settlement of claims

Many claims officers think that their responsibility is to reduce the claim payments and save money for the insurance company. They may not be aware that they also have a duty to ensure fair settlement of claims. Some states in America have laws that forbid unfair claim practices, such as:

–Refusing to pay claims without conducting a reasonable investigation
–Not attempting to provide prompt, fair, and equitable settlements
–Offering lower settlements to compel insureds to institute lawsuits to recover amounts due

This is taken from the text book that I use to teach Risk Management & Insurance at a local university.

Tan Kin Lian

Tuesday, January 19, 2010

Talk at Yishun Public Library

I am giving a talk at Yishun Public Library on Saturday 23 January 3 to 4 pm on the subject "Coping Financially in Difficult Times". More details are available here. I invite my readers to attend this talk.

LED lighting

According to this report, LED lighting has the potential to reduce energy consumption significantly.

Misleading illustrations

Some life insurance products were designed to provide an annual cash bonus. The underlying return on the policy is poor, usually less than 2% p.a., due to the high expenses and profit margin. To enjoy the cash bonus, the consumer has to pay an additional premium that is usually more than 10% of the cash bonus. For example, to get a cash bonus of $2,000, the additional premium could be $2,200 a year. The consumer is not aware about this type of structure.

To hide the poor return, the insurance agent tells the customer that the cash bonus can be re-invested in an investment linked fund to earn 5% or 9% per annum. This is stated to be not guaranteed, but the consumer does not know that the projections are over-optimistic.

By illustrating with this high projected return, the benefit illustration will show a higher return on the policy, perhaps 4% or more. If it was possible to earn 9% per annum, the consumer should invest the entire premium into the investment linked fund, rather than just the cash bonus.

I hope that the authority will ban this type of projection, as it is misleading to the consumer.

Tan Kin Lian

Big cut in maturity payment

A policyholder bought a 21 year anticipated endowment policy. At that time, the policy showed a projected return of 5.5% per annum. The company used 7% to project the accumulation of the triennial payments and also included reversionary and maturity bonus that were not explained in a transparent manner. However, the company did explain that the projected amounts were not guaranteed.

On maturity, the policyholder was given a payout that is about 35% lower than the initial projection. The final yield was reduced to 1.6% per annum. The insurance company explained that the low payout was due to the difficult investment climate. In my view, this is only partly true. Another major contributor was the highly optimistic assumptions used in the initial projection, to entice the consumer to buy the insurance policy.

I hope that the authority will ask the insurance company to be accountable for its initial projection. While it is acceptable for the final payout to be lower to reflect the actual investment climate, the difference should not be as much as 35%. I believe that this type of unfair treatment applies to large numbers of policyholders.

I have advised consumers not to trust the optimistic projections that are used to sell life insurance policies, unless there is a higher standard of business integrity and protection of consumer rights.

Tan Kin Lian

Benefit Illustration - Single Premium Whole Life Policy

I analysed the benefit illustration for a reader of my blog. The figures have been changed or removed to protect the identity of the policyholder.

1. You are investing a single premium of $30,000 in a life insurance policy. The distribution cost represents 7.9% of the invested sum. This is high, but it is typical of life insurance policies (where a high commission is paid to the agent).

2. If you decide to terminate the policy within 5 years, you will get a cash value that is less than the single premium. This policy, like all life insurance policies, provides poor liquidity. You cannot withdraw your investment without suffering a high penalty. As may need to withdraw your investment to meet some unexpected cash need in the future, it better to have the flexibility, especially in an uncertain world with insecure employment.

3. Here is the projected yield on your investment. If you keep the investment for 30 years, you are guaranteed a minimum cash value which represents a yield of 2.33% p.a. If the insurance company is able to earn an average yield of 3.75% on its investments in the future, they projected a non-guaranteed payout which a yield of 3.1% p.a. If they earn 5.25%, the non-guaranteed payout represents yield of 3.96% p.a. These yields are reasonable, but not attractive.

4. If you decide to invest on your own in an exchange traded fund, such as the STI ETF, and you receive an average yield, net of charges, of 5.25% over 30 years, your investment would accumulate to an amount that is 45% more than the non-guaranteed cash value provided by the life insurance policy at the end of 30 years.

5. I usually recommend to young people to learn about managing the risk of long term investments. After they understand the risk, they would usually prefer to invest in an exchange traded fund (which offers diversification of risk) and a potential better return. They will face short term fluctuation, but they understand that the fluctuation does not really affect the long term value of their investment.

6. You are offered an option for you to buy a rider that will accelerate the payment of the sum assured when you contract one of the critical illness. This “acceleration” means that the sum assured is payable earlier, rather than being paid on death. However, there is an additional cost for this “accelerated payment”. I think that the chance of making a claim is quite low, and this cost is rather high. But, I do not have the statistics to know if it is worth paying this additional premium for the accelerated benefit.

Tan Kin Lian

Safe deposit box

Hi there,
I am looking to open a safe box(X-small) and would appreciate if you could kindly assist.
By the way I have no idea of the size, price, terms and conditions. I have very tight budget constraint.

You can try CISCO. See here:

Switching a policy will incur high front end charge

Dear Mr Tan,
I would really like to seek your comments regarding a single premium whole life policy introduced to me after realizing that my endowment and whole life policies were not worth keeping. A financial adviser recommended me a 25 year whole life plan to replace my existing policies and I asked for a 'single premium' quote on the same plan. Attached is a copy of the BI. May I seek your advice if this policy is acceptable because I’m very confused

It is usually a bad idea to switch from one policy to another, as you have to incur the upfront cost again, and this will give good commission to the insurance agent. Generally, I would advice people not to make such a switch, unless there are clear advantages of doing so.

If you are not able to trust the agent who is making the recommendation to you, you should not buy the new policy from the agent.

I am not able to study your case in detail. If you wish to get advice, you can contact FISCA. They will get a volunteer to asssit you to understand the benefit illustration but you have to pay an admin fee of $50. You can contact FISCA at

Monday, January 18, 2010

Transparency Initiative - How the FDA works

The Food & Drug Administration has launched a website to explain how it carries out its work. Read this report.

RSS feed on my blog

A regular visitor to my blog said the he had problem with the RSS feed for the past two days? Can other visitors on RSS feed share your experience?

Get the Benefit Illustration

A few people have asked me quite difficult questions on the life insurance policies that have been marketed to them. They ask, "is it all right to invest in the policy?"

Quite often, the policies are specific to the company that has offered it. I am not aware about the features of the policies, or the charges that are being taken away from the premiums that have to be paid. I know that, in most cases, the charges are excessive and the insurance policy represents a bad investment for the consumer, but I am not able to give a conclusive view, without the underlying facts.

My reply to the consumer is, "get the Benefit Illustration and send it to me". With the Benefit Illustration, I can point out the key points in the policy and how consumers are being overcharged, or "ripped off".

A few consumers who sent their Benefit Illustrations to me in the past were shocked that a large part of the potential investment gain was taken away from them, and this was not explained by the financial adviser who sold the policy to them. When they learn about it, it was already too late.

If you want my views, send the Benefit Illustration to me.

Tan Kin Lian

Managing investment risks

Many people are risk averse. They are afraid of taking investment risks and making a loss. The investments that gives the best long term return are equities, but they are also the most volatile, i.e. the price can go up and down by a large percentage in a few days or weeks.

A long term investor should not worry about the short term changes in the price of the shares. As long as they keep the shares, they do not have to take a loss. The value of the shares will eventually recover and give an attractive return. This has been the trend over the past years.

There is the risk of selecting the wrong shares, which may perform worse than the market or may even go bankrupt. This risk can be minimized through diversification, i.e. investing in a fund comprising of 10 or more shares. Some shares in the fund may perform badly, but they will be offset by the other shares that perform better than the market.

There is still the market risk. In a bad stock market, most shares will perform badly. The bad market may last for a few months or even a few years. A long term investor is able to ride out the bad years and will be compensated by the good years, to get an above average return. I describe this strategy as "averaging out the good and bad years".

By investing in a fund, the long term investor does not have to worry about picking the right stocks, or managing the individual investments, such as collecting the dividends and subscribing to the rights issues and other corporate actions. These fund manager will take care of these activities.

It is important for the long term investor to choose a fund that have low initial and annual charges. They can choose an exchange traded fund (ETF) that meets these two criteria. The STI ETF has a transaction charge of 0.3% and an annual management fee of 0.3%. Some other ETFs have higher annual charges, but they are usually less than 0.7%.

The investor can choose a unit trust that has an upfront charge of about 2% and an annual fee of about 1%. The unit trust is actively managed and is aimed at producing a better return than an ETF through the active selection of the fund manager. Research has shown, however, that over the longer term, the actively managed unit trusts perform worse than ETF, after deducting fees.

If you select the right unit trust, you may get a better return than average, but the challenge is selecting the right fund. It has been found that past performance is not an indication of future performance. Choose the funds that performed well in recent years may not be a good strategy.

For a long term investor, the tip is, invest in an exchange traded fund that have low annual charges, of less than 0.5%. Invest for the long term and do not worry about the fluctuations in the market. This type of investment is better than investing in life insurance policies, due to the extremely high charges taken by life insurance companies (usually 3% per annum).

Tan Kin Lian

Survey: Educating the young

Here are the results of the survey based on 47 replies.

About 90% refer an education system that has the following features:

> educate the young to be literate, numerate, have social skills, and moral values, instead of achieving academic excellence.
> a less competitive system, so that parents do not have to put pressure on students to study hard through homework and private tuition
> gives higher priority to non-academic subjects, such as moral values, character, social skills and interaction?
> encourage some people to pursue other forms of personal development, instead of university degrees

However, about 20% (i.e. more than 10%) are satisfied with the current system which emphasis academic excellence, and picks future leaders from the scholars.

The survey is still open for participation. Click here.

Migrant and foreign workers

The following terms have been used to describe the foreigners who are now working in Singapore:

foreign talent
foreign workers
migrant workers

Previously, the word "foreign talent" was commonly used by our political leaders, mainstream media and even by the common people. I have spoken a few times against the use of this term, as it is inappropriate and demeaning to Singaporeans.

I found that the mainstream media has started to use the term "foreigners". While this is more appropriate, I still find that it is an unnecessary distinction. If we have to use a term, perhaps "immigrant" would be more appropriate. It implies a willingness of these workers and their families to make a future in Singapore.

Tan Kin Lian

Sunday, January 17, 2010


Mr TAN Kin Lian

I like to suggest that you create a LABEL on “Foreign Talents” and “Foreign Talents Policy” in your website. I discover that there are a lot of mis-communications on “Foreign Talents” and “Foreign Talents Policy”.


With the discussion and reaction of some Singaporeans, it may seem that Singaporeans are not welcoming foreigners. I think this is a wrong description of Singaporeans.

Many of us, including myself, used to work overseas one time or another. We were foreign talents, once upon a time. We also have a lot of foreigners’ friends. I think Singaporeans are warm people. As a Singaporean, I am looking forward to Singapore Government to make a clear statement of what is their FTP. For example, what category of talents we are attracting and why. For example, what are the level of influx Singapore can absorb. The possibility lack of clear deliberation of FTP could result in Singaporeans calling for explanation. This is understandable because they are many foreigners living among our midst and doing the same job we used to do.

Some may have over-reacted, but many could be just striving understand what is FT and FTP. Unfortunately, calling for explanation and rationale could be seen as unwelcoming FT. This is sadly not the case for Singaporeans.

Maybe, MR TAN could help to elaborate what is Government’s FTP; alternatively, you can help Singaporeans to raise intelligent questions for the Government to answer them. I really hope that local breed and bred Singaporeans to live in harmony with FT in our midst. Even if Singaporeans do not agree with Government’s FTP, we cannot conclude that Singaporeans do not live alongside FT. Singaporeans want to welcome foreigners, but at the same time they need a FTP that fit the need of social and economics objectives of Singapore.

Demographics is an important fabrics of the society, and I think FTP should be deliberated clearly and convincingly to Singaporeans at large. This is the best way to cultivate sense of belonging to this little land we are living in, and the best way to welcome and integrate FT among our midst. I like to conclude that it is good to have FT coming to our country. Singaporeans at large just want to know who are these FT and in what level of influx Singapore can absorb – socially and economically.

Once again, I think you could be the person who has sufficient depth of knowledge and grace for this subject matter. Thank you.


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